2018 Stock Market Review
After a long run, the US markets showed us in 2018 that they can go down. For the first time since 2008 the S&P 500 was down -4.38% for the year. What caused this is up for debate, but the word “uncertainty” was a key. Uncertainty about global growth, global trade, rising interest rates all weighted upon the market. Valuations were high coming into 2018, so companies needed to really post great numbers to support higher stock prices. S&P 500 companies posted their highest earnings growth since 2010, but that wasn’t enough. The uncertainty of trade and tariffs impacted corporate decision making on where to invest in plant and equipment, slowing growth. Additionally, concerns about rising interest rates wore on the market.
If you thought that going down in market capitalization might help you find better returns you were disappointed. The Russell 2000 index was down -11.01%. Smaller companies with more domestic sales were impacted by the same factors discussed previously. When investors began to sell in the fall, it appeared that they sold what they perceived as their riskiest positions first.
Stock markets across the world fared even worse. The MSCI-EFAE index was down -13.79%. The concerns here were similar, trade, tariffs, global growth. In addition, the uncertainty about Brexit weighted on European markets. Adding to the pressure was the rise of the US Dollar, which drove returns down even further.
The one bright spot, if you could call it that was the bond market. The Barclays Capital US Aggregate Bond Index was positive by the slightest of margins at .01%. Overall the yield curve became much flatter over the year with the Federal Reserve raising rates four times in 2018. While that is a full 1% in hikes on the very shortest end of the yield curve, the longer part of the yield curve moved around during the year. The benchmark 10- Year Treasury started the year at 2.74% rose to as much as 3.24% but finished the year at 2.69%.
We believe the market will continue to be volatile in 2019. It seems clear that the Federal Reserve will be much more “data dependent” in 2019, so we don’t foresee 4 rate hikes again. Concerns about growth across the globe is still relevant. In the US, while the tax cuts provided a “sugar high” for super-charged growth in the early part of 2018, we still don’t foresee a recession in 2019. But sluggish 2% – 3% growth.
What that means for portfolios is we tend to favor Large & Mid Cap US Stocks over Small Cap and International Stocks. We continue to own both Value & Growth stocks but are watching for Value to possibly outperform in 2019 for the first time in a decade. We continue to be wary in International Markets until we get more clarity about global growth, Brexit and the dollar. We are positioning portfolios to be a little more defensive amid the additional volatility we expect. We are continuing to keep bond duration short unless we see longer rates stabilize somewhere between 3.25% to 3.50% on the 10 Year Treasury.